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How the CFPB Approaches Examinations and Enforcement

Although a relative newcomer among regulatory agencies, the Consumer Financial Protection Bureau (CFPB) has established a reputation as a serious and fast-moving rule-making and enforcement agency for the financial services industry. Understanding the new agency’s impact on the industry, as well as its structure and methods, will be important for the sector in the months and years ahead.

David Williams, CEO, Deloitte Financial Advisory Services LLP

“With its significant statutory reach, broad enforcement authority and data-driven approach, the Consumer Finance Protection Bureau has been very active early on—particularly in issuing enforcement actions around certain types of consumer-related practices,” said David Williams, CEO of Deloitte Financial Advisory Services LLP, speaking during a recent Deloitte webcast discussing the new bureau, its enforcement powers and how organizations might prepare for examinations and other interactions.

Launched in response to the 2008 credit crisis and from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB was created as a single point of accountability in the federal government for consumer protection, consolidating operations previously spread across seven different federal agencies, including the Federal Reserve, the Federal Trade Commission and the Federal Deposit Insurance Corporation.

The CFPB’s mission is to make markets work more efficiently for consumer financial products and services and for U.S. individuals, whether they are applying for a mortgage, choosing among credit card providers or using other financial services products, explained Fred Curry, a principal with Deloitte Financial Advisory Services LLP, and a presenter on the webcast. To support its mission, the CFPB is divided into several units—regulation and supervision, research, community affairs, consumer complaints, an office of fair lending and an office of financial opportunity—which work together and monitor financial markets and trends to identify and regulate new risk to consumers. The CFPB also has developed a deep level of cooperation with other federal agencies, banking regulators and various state attorneys general.

“To date, the CFPB’s focus has been primarily on four different groups of consumers—students enrolled in colleges and universities, Americans aged 62 and older, service members including veterans, and groups that are in low income and economically vulnerable areas, including the unbanked, under-banked and those living below the official poverty line,” said Deborah Bailey, a director with Deloitte & Touche LLP, who also presented on the webcast.

“The CFPB has tackled a wide range of issues, including misleading disclosures, illegal fees, deceptive actions, violations of the federal telemarketing act and illegal kickbacks, among other charges,” added Mr. Curry. Many enforcement actions came from referrals from other agencies rather than from the CFPB examination itself.

Broad Enforcement Powers

The CFPB has broad powers and can issue subpoenas for testimony with documentary evidence, as well as civil investigative demands (CID) through administrative subpoena. Once a CID is issued the recipient has 10 calendar days to meet with the bureau to resolve issues regarding compliance and after that a short time to petition or modify its practices to satisfy the demand. The CFPB can also conduct investigative and administrative hearings and proceedings to enforce compliance.

“When it comes to settlement terms, the CFPB powers include jurisdiction to grant appropriate legal or equity relief,” noted Dennis Kiefer, a director with Deloitte Financial Advisory Services LLP and another webcast presenter. “The CFPB can also bring civil actions in federal court and can make referrals to other federal agencies.” Although the CFPB does not have criminal enforcement authority, it can refer a client into a criminal violation with the Department of Justice.

How Financial Services Companies Can Approach the Exam Process

The CFPB exam process revolves around three main principles:

Consumer Centric: The CFPB’s sole focus is on the risk to the consumer, distinguishing it from a more traditional regulatory approach focused on the risks to the financial institution—and its ability to manage them.

Data Mining: Data is central to the CFPB’s approach, particularly consumer complaint information and data gathered through market research. “The goal is to risk focus its supervisory activities and exam approach, in essence turning data into information it can use,” said John Graetz, a principal at Deloitte & Touche LLP, speaking during the webcast. “This is particularly important given that its exam force and budget for examinations is relatively small and growing,” he added.

Achieving Consistency: The CFPB expects each institution it supervises to achieve consistent and sustainable compliance. However, in its supervisory approach, the CFPB is also seeking consistency in the conduct of its own examinations. Toward that end, it has established the CFPB Supervision and Examination Manual, describing how CFPB staff examines companies and covers banks and non-banks, which are to receive the same type of treatment and scrutiny. “In the eyes of the CFPB, a mortgage is a mortgage whether or not it is originated by a bank or non-bank, and examiners are going to apply the same type of treatment and scrutiny,” said Mr. Graetz. “This move remediates, and is in response to, the disparate examination treatment of different types of lenders given the differences in their legal entity status,” he added.

The exam manual and the modules focus on three topics: the compliance management system, statutes and regulations and the products themselves, explained Mr. Graetz. There are exam procedures for mortgage origination, mortgage servicing and consumer reporting for larger participants. “The CFPB expects financial institutions to look at products from an end-to-end, holistic perspective, across their life cycle,” he added. That could begin with the marketing stage and then move to origination, servicing and collections and then include looking at the risks that may exist inherently and residually in each of those stages.

Preparing for a CFPB Exam

It is important to note the CFPB’s deep focus on managing third-party risk. The CFPB has emphasized that some third parties—including mortgage and student loan servicers, debt collectors and credit rating agencies—are relationships that the consumer had no role in selecting. The Dodd-Frank Act gives the CFPB legal authority to supervise some of the third-party companies with which the banks do business.

When preparing for a CFPB exam, consider the following steps:

Independently analyze the design of the compliance management system: A non-bank compliance management system may not be as broad or fully documented as that of a bank. Reconsider the design and take into account the third-party risk-management program.

Conduct an end-to-end risk assessment of products across the life cycle: Build a heat map that shows where risks are in the product life cycle. Consider where there may be unmitigated residual risk that might require attention and determine whether third parties could be delivering products anywhere along that spectrum.

Identify issues with potential consumer impact: While it is important to fix a control breakdown, it also is vital to analyze whether consumers were adversely impacted by that control breakdown. The next step involves remediating related activities, and follow up with affected consumers.

Consumer Complaints Database

The CFPB began to accept complaints about credit cards, mortgages, consumer loans and other products in 2011 and released the consumer complaint database (CCD) publicly last year. “The public database created a new risk dynamic for covered firms,” said Mr. Kiefer. “There are particular challenges regarding mortgages, and communication with consumers may be important.” With more than 118,000 entries, the database is growing by roughly 5,000 to 6,000 entries per month.

A Deloitte analysis of some 100,000 complaints submitted to the CCD between December 2011 and April of 2013 showed that four major themes have emerged:

Companies should understand the CCD and its contents: With its public face and central role, the CCD is shaping perceptions of consumers and regulators.

Mortgages carry particular challenges: Mortgage products are the leading source of complaints by far, comprising more than half of the total entries and growing. However, a very low number of mortgage-related complaints—only 15%—are resolved in the consumer’s favor.

Communication with consumers may be key: Since many complaints are not resolved in the consumer’s favor, communication is clearly critical for customers. A complaint that is not resolved in the consumer’s favor might suggest it is derived from consumer misunderstandings or frustrations rather than mistakes or operational errors by the company. Better communication with customers may help manage expectations.

Companies are learning how to address consumers’ concerns: The rate at which consumers dispute companies’ decisions has been dropping, suggesting that companies are becoming more adept at providing a more satisfactory response. Further, there has been a significant improvement in responding to complaints in a timely manner. Untimely responses, which were as high as 10% a year ago, have dropped to less than 1%.

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